When the initial SECURE Act was released in 2019, several sweeping changes were made that impacted Required Minimum Distributions (RMDs), retirement savings, and more. At the end of December 2022, the SECURE Act 2.0 was signed into law, as well.
This new piece of legislation worked to create additional opportunities for retirement saving while expanding the use of common savings vehicles such as Roth accounts, Qualified Charitable Distributions (QCDs), and 529 Plans. In this blog post, we’ll be going over the key items from the SECURE Act 2.0 that high-net-worth individuals need to know – and when these changes go into effect.
Changes to Required Minimum Distributions
The Secure Act 2.0 Legislation impacted RMDs by:
- Increasing the age for starting RMDs to 73, effective 2023. Gradually increases the age to 75 by 2035.
- Eliminating the RMD requirement for those participating in a Roth plan through their employer (like a Roth 401(k)).
- Reducing the penalty tax for not taking, or taking less than, your RMD due for the year.
Because these changes can be so impactful to retirement planning, we’ve compiled a deep dive into information about these changes and how they could affect you: SECURE Act 2.0, everything you need to know about RMDS.
Higher Catch-Up Contributions For Pre-Retirees
Under the new SECURE Act 2.0 legislation, higher catch-up contributions are allowed for individuals from 60-63 years old. Catch-up contribution limits for this age group will increase to $10,000/year in January of 2025, with some exceptions.
For Those Making Over $145,000/Year
If you earn over $145,000 per-year, catch-up contributions made after age 50 must be made to a Roth account. For many Massachusetts residents, this is a critical change to keep in mind. Essentially, your catch-up contributions will be made to a Roth account (401(k) or IRA) instead of your Traditional 401(k) if your salary is over $145,000 per year and you’re over the age of 50. This means that these contributions will not reduce your taxable income now, but will continue to grow and be withdrawn tax-free in retirement. This change goes into effect in 2024.
Employers Can Provide Matching Through Roth Accounts
Likely as a result of the new Roth catch-up contribution requirements for high-earning employees, employers are currently able to provide matching contributions to Roth accounts. Historically, employers could only make matching contributions to pre-tax accounts, like your 401(k). Now, however, they can match contributions across the board. For employees who are looking to diversify their retirement savings and leverage Roth accounts, this may be a notable benefit.
Qualified Charitable Distributions
Starting in 2023, investors aged 70 ½ and older can make a QCD distribution of up to $50,000 as a one-time gift to a unitrust, a charitable remainder trust, or a charitable gift annuity. While this may not be a common tax savings strategy, for some retirees looking to offset notable capital gains in their portfolio, it’s an important option to keep in mind. Read more about tax-smart strategies for charitable giving here.
529 Plan Changes
Beginning in 2024, 529 Plan beneficiaries who have had an open account for 15+ years will be eligible to roll some remaining funds over into a Roth IRA in the same name as the beneficiary without paying taxes or penalties. This benefits 529 Plan beneficiaries who didn’t use their full account balance, but haven’t transferred funds to another beneficiary after graduation. However, there are a number of stipulations to keep in mind:
- The lifetime maximum a 529 beneficiary can transfer under the rule is $35,000
- The 529 account must have existed for at least 15 years
- No contributions or earnings on contributions from the last five years can be transferred
- The transfers are subject to annual Roth IRA contribution limits (there is no upper-income constraint, although the Roth IRA owner must have earned income equal to or exceeding the rollover).
Qualified Longevity Annuity Contracts
Qualified Longevity Annuity Contracts (QLACs) are often used as a retirement vehicle in the portfolios of high-net-worth individuals. The SECURE Act 2.0 expanded RMD exemption eligibility for QLACs. The new legislation allowed for:
- Increased QLAC dollar amounts from $125,000 to $200,000.
- Removed the requirement that QLACs don’t exceed 25% of an investor’s IRA balance.
- Allows for investors to rescind their QLAC contract within 90 days.
This change went into effect at the end of 2022.
Employers: Automatic 401(k) Enrollment
If you are an employer, it’s worth keeping in mind that the SECURE Act 2.0 changes the enrollment requirements for employees who have access to a company 401(k). Starting in January of 2025, all newly formed 401(k) and 403(b) plans offered in businesses with 10 or more employees, will need to auto-enroll employees to their plan at a contribution rate of 3% of their salary. That contribution will be increased by 1% annually until it reaches 10 or 15%, or the employee opts out.
Continuing to maximize your savings despite shifting legislation can be a headache.
We’re here to help!
Although many of the SECURE Act 2.0 changes don’t go into effect right away, it can be helpful to collaborate with a team of comprehensive financial planners to ensure that you’re staying ahead of changes like these. Contact our team today to learn more about how partnering with a financial advisor could positively impact your financial life.